Massachusetts health care reform enters new phase

John J. Monahan TELEGRAM & GAZETTE STAFF

Published Monday June 25, 2012 at 6:00 am

The likely adoption next month of a new phase of state health care reforms aimed at cost containment is expected to alter the way the region’s hospitals are financed and set up an array of economic incentives to lower medical costs.

Coming in advance of a trillion dollars in federal deficit reduction spending cuts that could cut Medicaid and Medicare funding, and amid demands from employers for lower insurance costs, the reforms have local hospitals braced for fundamental change.

“When you have a combination of those factors, it’s a little bit of a perfect storm and certainly a powerful statement for health care systems to say we need to move quickly to provide better value, get our costs down, improve access and better coordinate care for all of our patients,” said UMass Memorial Health Care Chief Executive Officer John G. O’Brien.

“As the head of a health care system in this state, if you are not prepared or getting prepared today, then you need to get focused immediately, because it is upon us,” Mr. O’Brien said of the series of cost reduction efforts converging on the state’s medical system.

About 2,000 employees at UMass Memorial Health Care, a not-for-profit network that provides health care to nearly 500,000 people in Central Massachusetts at its Worcester hospitals and other medical centers in the region, have been trained to work in dozens of teams assigned to root out cost savings across all its services and operations.

Across the city, officials at the for-profit St. Vincent Hospital said cost control will be one of its largest-ever challenges. But, they said, they are looking to a lower-cost medical market as an opportunity to expand its customer base, taking advantage of the relatively lower costs charged for care at its hospital.

The cost containment bill is now undergoing final negotiations to hammer out differences between Senate and House versions that will change the way health care is purchased. Payment systems that currently have hospitals bill insurers for each service will be replaced with payment systems that charge patients and insurance companies for overall care for groups of insured patients.

Aiming to wring out about $150 billion in savings over 15 years, the proposed reforms would also cap health care cost increases. The increases would be linked to within a half-percent of the annual increases in the state’s annual gross product, which was 3.5 percent last year. Another change will penalize hospitals that charge higher rates for similar procedures, which could impact higher cost hospitals like UMass Memorial, now in the top tier of Massachusetts hospitals based on fees for services.

A recent study by the Blue Cross Blue Shield of Massachusetts Foundation detailed how much health care costs have been rising in Massachusetts. It predicts a doubling of costs from 2009 to 2020 without intervention.

The study also found Massachusetts spends more on health care per capita than any other state, and that residents are paying higher shares of their household budgets on health care, as wages have stagnated but medical care costs have steadily risen over the last 10 years.

Mr. O’Brien said the state is in a better position than most to control costs, having expanded coverage, including preventive care, to 98 percent of residents since 2006. Since then, he said, most health care executives in the state have known the end game would be to reduce hospitalizations, and expand primary and prevention services, to produce a healthier population that requires less hospital care.

“We actually think the health care system, once we get through probably a fairly difficult transition, will probably be a much better health care system. Certainly it is going to be a lot more affordable for the federal government and the employer community,” Mr. O’Brien said. But getting there will be hard.

“We do expect the transition over the next three to four years is going to be very challenging to health care providers,” he said.

The current fee-for-service system rewards hospitals for every service they provide, he said. With a system of global payments for coordinated care at hand, he said, UMass Memorial will have to find ways “to get upstream, as we say, into the headwaters of prevention.”

Cost containment will mean reducing the total burden of illness, say for the 470,000 people served by UMass Memorial.

Hospitals will have to find ways to manage care for seniors and those with chronic diseases to reduce hospitalizations and keep them home and healthy, he said. Cost containment will also force them to address difficult public health issues.

“How do we deal with the fact that 62 percent of the people in Worcester are overweight or obese?” he asked.

“That is going to be our financial sustainability model as we go forward, so population health is going to become much more in vogue,” Mr. O’Brien predicted.

National forces will also be bearing down on the state’s medical industry.

Mr. O’Brien said the potential for parts of the national health reform law to be struck down by the Supreme Court would likely have less effect here than in other states, although several hundred million dollars in Medicaid funding could be at stake.

“At some level, that is a secondary issue for us, because the train is out of the station in Massachusetts relative to health care reform,” Mr. O’Brien said.

But with Congress being forced to cut 1 trillion from the budget starting in January, as part of last year’s debt ceiling agreement, deep cuts could come quickly, he said.

“The question is going to be when they start dealing with the deficit at the end of the year, and confront the whole sequestration issue of more than a trillion dollars in cuts. How much is going to come from defense and other areas and how much will they turn to health care system and particularly hospitals to make additional cuts?” Mr. O’Brien said.

“After the first of the year, if anything, the cuts are going to get more severe,” he said and Medicaid reimbursements, cut each of the last two years, will continue to be cut year after year for the next decade.

Dennis L. Irish, vice president of business development and external affairs for Vanguard Health Systems, which operates both St. Vincent Hospital in Worcester and the MetroWest Medical Center in Framingham and Natick, said absorbing federal cutbacks and conversion to new payment systems will not be easy.

“We will be facing some of the greatest challenges possibly we have ever had to face,” Mr. Irish said.

But he said, “St. Vincent and the MetroWest Medical Center are relatively well-positioned, having already established lower-cost operations, compared to larger teaching hospitals that charge higher fees.”

As a result, he said, St. Vincent Hospital will be able to better market itself to the public and insurance companies, possibly by offering lower out-of-pocket and lower deductible coverage for group coverage arrangements.

“In terms of performance, we are among the safest in the commonwealth and providing very high quality care. We are also reimbursed at or below the median for all the hospitals, so we are a pretty good value,” Mr. Irish said.

In the post-reform world, he said, institutions like St. Vincent Hospital will be rewarded for keeping costs lower than others. Insurers are already offering tiered or limited network insurance plans that favor lower cost hospitals like St. Vincent. St. Vincent is reimbursed now at 79 percent of the state median rates, and even lower percentages compared to a hospital like UMass Memorial Medical Center.

“Previously, we were punished for this. Now we will be rewarded,” Mr. Irish said.

Mr. Irish said the danger in that cap is that the health care industry, the state’s top employer, could begin receding. Also he said lower Medicare and Medicaid reimbursements could shift the underpayment by public payers to those who are privately insured.

The hospital is already making more of computerized records and new medical technology and is gearing up prevention and wellness systems and better access to primary care. Mr. O’Brien said the state government caps on cost increases remind him of rate regulations tried 20 years ago, which were ineffective. He would rather see the payment system changes play out so that market forces would control spending.

“What we have to remember is that healthcare spending is going to increase. For the next 17 years, on average, more than 10,000 people every day will turn the age 65. The population is aging, people are living longer and there is a cost associated with that,” Mr. O’Brien said. It’s obvious, he said, the drive to control costs and the aging of the population, “are not in sync.”